5A - Total Flashcards
Wexford Co. has a subunit that reported the following data for Year 1:
Asset (investment) turnover: 1.5 times
Sales: $750,000
Return on sales: 8%
The imputed interest rate is 12%. What is the division residual income for Year 1?
$0
Wexford has a return of 8% on sales revenue of $750,000, so net income is $60,000.
Asset turnover is a measure of how effectively a business unit uses its assets. It equals sales revenue divided by average total assets. If the turnover is 1.5 times, the revenue of $750,000 can be divided by the turnover of 1.5 to find that total assets equal
$500,000.
Residual income is operating income less the imputed interest on the assets used to generate the income. The imputed income at 12% multiplied by assets of $500,000 is $60,000. Subtracting imputed income of $60,000 from net income of $60,000 leaves residual income of zero.
ROI = ?? Profit Margin = ?? Asset Turnover = ?? Capital Turnover = ?? Price-Earning Ratio?
ROI: Net income / Invested Capital PM: Net Income / Sales AT: Sales Rev / Total Avg Asset Cap Turnover: sales / Invested Capital PE: Mkt price of stock / EPS
___is the amount of net income in excess of a minimum desired rate of return on invested capital.
ex:
Net income $150
Return on investment at minimum rate of return
($1,000 at 0.12) 120
Residual income $ 30
====
___measures surplus or excess value created by an enterprise’s investments.
_____ measures provide a more comprehensive picture of performance that considers a wider range of possibilities.
___decision making: At the division level, when one performance measure (such as return on investment) is not relied upon solely or given a high emphasis, managers are free to make decisions that are more in tune with the long-term profitability growth objectives of the company as a whole.
Residual income
Economic value added (EVA)
Multiple performance
Congruent
The following selected data pertain to the Darwin Division of Beagle Co. for the current year:
Sales $400,000 Operating income $40,000 Capital turnover 4 Imputed interest rate 10% What was Darwin's current-year residual income?
$30k
Capital turnover = Sales / Invested capital
4 = $400,000 / Invested capital
4 x Invested capital = $400,000
Invested capital = $400,000 / 4 = $100,000
Operating income $40,000
Less imputed interest on
invested capital (10% x $100,000) 10,000
——-
Equals residual income $30,000
The resource base figures prominently in performance measures such as return on investment, residual income, and economic value added. The theoretically superior (not necessarily the one most widely used) investment base would be: HISTORICAL COST
False - Replacement Value
Replacement cost is a measure of current value. Since revenue and most expenses are also stated in terms of current value, a more consistent performance measure (i.e., return on investment or residual income) will result when all variables are stated in current dollars.
Vince, Inc., has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device?
___ & __ of the new device
Customer’s relative preference for __compared to __
Quality & Life
Pref for Quality compared to Price
All of the factors listed—quality, life, and customers’ preferences—should be considered by Vince, Inc., in setting the price of the new laser disc device.
Since the device is new, competition (either price or other products) is not as likely to be a factor as would be the case later on.
Minon, Inc., purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?
Increase in both return on investment and residual income
Decrease in both return on investment and residual income
Increase in return on investment and decrease in residual income
Decrease in return on investment and increase in residual income
Decrease in both
Return on investment (ROI) is calculated by dividing the invested capital into the net income. If the invested capital increases due to a long-term asset purchase, then the ROI will decrease.
Residual income is the amount of net income in excess of a minimum desired rate of return on invested capital. This can be expressed in the equation: Reported net income - (Desired rate of return × Invested capital). If invested capital increases, the residual income will decrease.
Residual income is a performance evaluation that is used in conjunction with return on investment (ROI) or instead of ROI. In many cases, residual income is preferred over ROI because:
residual income is a measure over time while ROI represents the results for a single time period.
residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI
the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI
average investment is employed with residual income while year-end investment is employed with ROI
residual income concentrates on maximizing absolute dollars of income rather than a percentage return as with ROI
What is strategic planning?
It consists of decisions to use parts of the organization’s resources in specified ways.
It establishes the general direction of the organization.
It establishes the budget for the organization.
It establishes the resources that the plan will require.
It establishes the general direction of the organization.
The ___of an organization is its central purpose, the reason for its existence. It answers the questions “What business are we in?” and “What business do we want to be in?”
Strategic goals are the major goals that relate to the company’s mission T/F
mission
True
In for-profit companies, a major part of strategic planning would be profit-related. T/F
___and plans translate overall strategy into shorter-range specifics for each division or department.
\_\_\_and plans are detailed implementation of the company's strategy. They are annual plans with specific objectives for individual operating units
____plans are sometimes called disaster recovery plans, to be implemented in case of fire, flood, power outages, etc.
True
Tactical objectives
Operational objectives
Contingency
An effective ___system is necessary for an organization to realize its strategic, tactical, and operational goals.
Three components that make it effective
- ___activities and processes (measurement of progress)
- Identifies ___& implement corrective action
- Flexibility to be updated (Adapts to change) T/F
control
Monitors
deviations
True
Brent Co. has intracompany service transfers from Division Core, a cost center, to Division Pro, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities?
Actual cost
Standard variable cost
Actual cost plus mark-up
Negotiated price
Variable Cost
Variable costs include direct costs that can generally be controlled by the division to which they are allocated.
“Actual cost” and “Actual cost plus mark-up” are incorrect because actual costs can be controlled by the cost center.
Three methods for establishing a transfer price
Market-based price
Cost-based price
negotiated price
___ price: The transferring entity prices the goods or services to the buying entity at a price equal to that prevailing for those goods or services on the open market.
___The transferring entity prices the goods or services to the buying entity at its cost of providing the good or service
\_\_\_price: The transferring entity prices the goods or services to the buying entity at a price that is mutually acceptable to both the selling and buying divisions.
Market-based
Cost-based prices:
Negotiated
Objectives in transfer price
Evaluate \_\_\_ \_\_\_ taxes \_\_\_ tariffs \_\_ exchange rates Move Cash t/f Improve \_\_\_ position
Performance Minimize Minimize Hedge True Competitive
Which of the following terms represents the residual income that remains after the cost of all capital, including equity capital, has been deducted?
Free cash flow
Market value-added
Economic value-added
Net operating capital
EVA
Economic value added (EVA) is after-tax operating income less the weighted average cost of capital.
A company’s target gross margin is 40% of the selling price of a product that costs $89 per unit. The product’s selling price should be:
$124.60
$142.40
$148.33
$222.50
148.33
Revenue 100%
COGS (cost of goods sold) 60%
Gross profit 40%
(Sales − 0.40) × Sales = $89
0.60 × Sales = $89
Sales = $89 ÷ 0.60 = $148.33
A variety of nonfinancial measures—from the accounting system or from other data sources—can be used to evaluate performance. Examples of nonfinancial measures include:
a. inventory turnover,
b. labor efficiency,
c. on-time deliveries,
d. schedule attainment,
e. units per hour,
f. throughput time,
g. measures of customer satisfaction (e.g., from such indicators as surveys, repairs, complaints, or number of service calls), and
h. measures of environmental compliance.
YEAH
Nonfinancial measures can be used to evaluate performance. Which of the following is a nonfinancial measure?
Free cash flow
Capital asset ratio
Labor efficiency
Quick ratio
Labor Efficiency
Under the balanced scorecard concept developed by Kaplan and Norton, employee satisfaction and retention are measures used under which of the following perspectives?
Customer
Internal business
Learning and growth
Financial
learning and growth
The balanced scorecard views an organization from four perspectives; metrics are developed and data is collected and analyzed for each of the following four perspectives:
___This perspective forms the foundation of all knowledge-worker organizations and includes employee training and corporate cultural attitudes related to individual and corporate self-improvement.
____Metrics based on this perspective provide managers with feedback regarding how well their business is operating, and whether its products and services meet customer requirements (the mission). Examines a company’s success in targeted market segment
____If customers are not satisfied, they will eventually find another supplier(s) that will meet their needs
___Even under a scorecard system, there remains a need for traditional financial data, provided that any undue emphasis on financial-related data does not “unbalance” the other perspectives.
Learning and growth:
Business (internal) processes:
Customer (satisfaction) perspective:
Financial:
Residual income of an investment center is the center’s:
income plus the imputed interest on its invested capital.
income less the imputed interest on its invested capital.
contribution margin plus the imputed interest on its invested capital.
contribution margin less the imputed interest on its invested capital.
income less the imputed interest on its invested capital.
Residual income is the amount of net income in excess of the imputed interest on its invested capital, so “income less the imputed interest on its invested capital” is correct.
The imputed interest on investment is a rate determined by corporate headquarters to encourage the investment center managers to invest in projects that would return more than that rate since residual income will be increased.
Integrating TQC (total quality control), TQM (total quality management), and JIT (just-in-time) controls achieves many benefits. Which of the following is not a benefit of using these techniques?
Fewer defective units are produced before the problem is identified.
The process causing the problem can be fixed before additional bad units are produced.
Higher-quality products improve customer satisfaction.
Focus on finding the problem and fixing the problem after it occurs
Focus on finding the problem and fixing the problem after it occurs
QC, TQM, and JIT are preventive measures and are used to identify critical process points to reduce problems or defectives units at the earliest point of identification, resulting in fewer defective units produced before the problem is identified (no need to wait for defective units to reach a critical threshold) and the process causing the problem being fixed before more bad units are produced.
TQC and JIT are often combined so that the production process is stopped whenever something goes wrong. T/F
\_\_\_\_involves all employees in the quality control effort. It is the unending quest for perfect quality—the striving for a defect-free manufacturing process. \_\_\_\_is a manufacturing philosophy that promotes the simplest, most efficient means of production. Under ideal conditions, the company would receive raw materials just in time to go into production, manufacture parts just in time to be assembled into products, \_\_\_is the application of quality principles to all of the organization's endeavors to satisfy customers. It is a method of managing the organization to excel on all dimensions.
True
Total quality control (TQC)
Just-in-time (JIT)
Total quality management (TQM)
Benchmarking is a measurement of quality. Which of the following is not a characteristic of benchmarking?
Comparing organizational products, programs, and strategies with peers
Measuring the organization against “best in class”
Measuring only internal quality for products, programs, and strategies
Analyzing how other organizations achieve their high-performance levels
Measuring only internal quality for products, programs, and strategies
Benchmarking is a measurement of quality which entails comparing an entity’s policies, products, programs, strategies, etc. with standards or peers, usually those considered best-in-class.
These performers may be INTERNAL OR EXTERNAL (not just internal), and they are not limited to the benchmarking entity’s industry or area.
___is a measurement of quality which entails comparing an entity’s policies, products, programs, strategies, etc. with standards or peers, usually those considered best-in-class.
Benchmarking
Costs that can be definitely influenced by a given manager within a given time span are best defined as:
controllable costs.
period costs.
fixed costs.
variable costs
Controllable Cost
Period costs are those deducted as expenses during the current period without having been previously classified as costs of inventory.
____costs are those deducted as expenses during the current period without having been previously classified as costs of inventory.
Costs that can be definitely influenced by a given manager within a given time span are best defined as
___
Period Costs
Controllable Costs
A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using?
Total quality management
Statistical process control
Economic value-added
Benchmarking
Benchmarking
Benchmarking entails comparison of process performance with other process performers, usually best-in-class performers. The other company can be in the same industry or other industries.
Statistical process control is a method of process control that uses statistical methods.
A company’s common stock has a market value of $45. The company’s most recent annual earnings per share is $3.60 and the company pays an annual dividend of $1.50 per share. What is the company’s price-earnings ratio?
12.5
Freer Co. purchased a piece of machinery for $50,000. Freer will use the machinery in the production of its product line for five years, at which time the machinery will have a residual value of $5,000. Freer anticipates that it will produce 90,000 units the first year with total units of 450,000. Which of the following methods will allow Freer to claim the greatest amount of depreciation in the first year?
Straight line
Sum-of-the-years’-digits
Double-declining balance
Units of production
Double-Decline
Sum-of-the-years’-digits (SYD) = 5/15 × ($50,000 − $5,000) = $15,000
Double-declining balance = (1/5 × 200%) × ($50,000) = $20,000
Units of production = (90,000 units ÷ 450,000 units) × ($50,000 − $5,000) = $9,000
hich of the following balanced scorecard perspectives examines a company’s success in targeted market segments?
Financial
Customer
Internal business process
Learning and growth
Customer
To evaluate its performance, the Blankie Co. is comparing its costs of quality from one year to the next. The relevant costs are as follows:
First Year Second Year
Prevention $45,000 $60,000
Appraisal 25,000 35,000
Internal failure 80,000 50,000
External failure 75,000 65,000
Which of the following conclusions can Blankie draw about its quality program?
It has been a failure, because conformance costs decreased by $40,000 while nonconformance costs increased by $25,000.
It has been a success, because conformance costs decreased by $40,000 and nonconformance costs increased by $25,000.
It has been a failure, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.
It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.
It has been a success, because conformance costs increased by $25,000 while nonconformance costs decreased by $40,000.
In total quality control costs, the cost of conformance is the sum of prevention costs plus appraisal costs, $70,000 the first year and $95,000 the second year, an increase of $25,000.
The costs of nonconformance (failure costs) include internal failure and external failure, $155,000 the first year and $115,000 the second year, a decrease of $40,000.
The quality program is a success because the net decrease in quality control costs was $15,000.
In total quality control costs, the cost of conformance is the sum of prevention costs plus appraisal costs, T/F
The costs of nonconformance (failure costs) include internal failure and external failure, T/F
T
T
Ratio for Manufacturing Cycle Efficiency
Manufacturing or Process Time
______________________-
Time from start of manufacturing to delivery
Wolk Corporation is a highly automated manufacturing firm. The vice president of finance has decided that traditional standards are inappropriate for performance measures in an automated environment. Labor is insignificant in terms of the total cost of production and tends to be fixed, material quality is considered more important than minimizing material cost, and customer satisfaction is the number one priority. As a result, delivery performance measures have been chosen to evaluate performance. The following information is considered typical of the time involved to complete orders.
Wait time:
From order being placed to start of production 10.0 days
From start of production to completion 5.0 days
Inspection time 1.5 days
Process time 3.0 days
Move time 2.5 days
What is the manufacturing cycle efficiency for this order?
25%
Manufacturing or Process Time
______________________-
Time from start of manufacturing to delivery
= 3 days / (5 days + 1.5 days + 3 days + 2.5 days)
= 3 days / 12 days
= 25.0%
We ignore From order being placed to start of production 10.0 days b/c we dont have it
Rework costs should be regarded as a cost of quality in a manufacturing company’s quality control program when they are:
caused by the customer.
caused by internal failure.
II only
